Finance Act 2014

Relevant to Paper P6 (UK) for the June, September, December 2015, March and June 2016 exam sessions

This article should be read by those of you who are sitting Paper P6 (UK) in an exam in the period 1 April 2015 to 30 June 2016. 

This article summarises the additional changes introduced by the Finance Act 2014 that have an effect on the Paper P6 (UK) syllabus.

All of the changes set out in the Paper F6 (UK) article (see ‘Related links’) are relevant to Paper P6 (UK). In addition, all of the exclusions set out in the Paper F6 (UK) article apply equally to Paper P6 (UK) unless they are referred to below.


The comprehensive computation of taxable income and income tax liability

Interest paid for a qualifying purpose
Interest paid on a loan taken out for a qualifying purpose is deducted from an individual’s total income when calculating their income tax liability. One such qualifying purpose is the purchase of shares in a close company.

For the purposes of identifying qualifying interest, the meaning of the term ‘close company’ has been broadened by Finance Act 2014. This extended meaning now encompasses close companies and companies which are resident in the European Economic Area (EEA) and would be close companies if they were resident in the UK.

If you were not sure of the point being made by the previous paragraph, remind yourself of the fact that, for a company to be a close company, it must be resident in the UK. So this change to the rules is intended to provide equal treatment for all companies resident within the EEA.

Income from employment

The tax treatment of share option and share incentive schemes
There have been a number of changes to the rules for share option schemes and share incentive schemes. Some of these changes are purely administrative and include changes to the official names of the schemes as set out below.

Old nameNew name
Approved share incentive planSchedule 2 share incentive plan
Approved SAYE schemeSchedule 3 SAYE option scheme
Company share option planSchedule 4 company share option plan

Other changes that have been made include:

SAYE share option scheme

  • The maximum amount that an employee can save each month within a SAYE scheme has been increased from £250 to £500. The minimum amount continues to be £5.

Share incentive plan (‘SIP’)
Members of a SIP can acquire shares in four different ways:

  1. Free shares are given to the members by the employer. The annual limit for free shares has been increased from £3,000 to £3,600.
  2. Partnership shares are purchased by the scheme members. The annual limit for partnership shares has been increased from £1,500 to £1,800 (this is still limited to no more than 10% of the employee’s salary for the year).
  3. Matching shares are given to those employees who purchase partnership shares. There has been no change to the rule that an employer can award a maximum of two matching shares for each partnership share purchased.
  4. Dividend shares are shares purchased by scheme members using dividends received from the shares already held in the SIP.  There has been no change to the rule (introduced in Finance Act 2013) that there is no limit on the amount of dividends which can be reinvested in the SIP.

The tax treatment of employee shareholder shares

The concept of employee shareholders was introduced by Finance Act 2013 and came into effect from 1 September 2013. An employee shareholder is an employee who has agreed to give up some of his employment rights, for example in relation to statutory redundancy pay in exchange for an award of shares in his employer or a parent company.

The employee must not pay anything for the shares; the only consideration is the change to the employee’s employment rights. The shares received must be worth at least £2,000.

There are both income tax and capital gains tax advantages to receiving employee shareholder shares.

  1. Income tax
    From the point of view of income tax, the employee is deemed to have paid £2,000 for the shares. The excess of the value of the shares over £2,000 is subject to income tax in the normal way. Similarly, if the shares are readily convertible assets, such that they are subject to Class 1 National Insurance Contributions (NICs), NIC will only be payable on the excess of the value of the shares over £2,000.

    An employee who holds at least 25% of the voting rights in the company (‘a material interest’) is not regarded as having made the payment of £2,000. Accordingly, the whole of the value of the shares received would be taxable.

  2. Capital gains tax
    Any chargeable gain arising on the first £50,000 in value of employee shareholder shares received by an employee in respect of a particular employment is exempt.

    If a loss arises on a disposal of employee shareholder shares, that loss will not be an allowable loss if the gain would have been exempt due to the operation of the above rule.

    There is an additional share identification rule where an individual holds a mixture of employee shareholder shares and other shares in a particular company. On a disposal of shares, the individual can decide what proportion of the shares sold are employee shareholder shares.

    Employee shareholder shares are not treated as exempt assets if the employee holds at least 25% of the voting rights in the company.


Taxable total profits

Research and development (R&D) expenditure
Where a small or medium-sized company incurs qualifying expenditure on R&D, it can claim an additional tax deduction of 125% of the costs incurred, ie a total tax deduction of 225% of the costs incurred.

Where the company incurring the expenditure has made a trading loss, it can claim a tax payment equal to the lower of:

  • its trading loss for the period; and
  • a percentage of the qualifying expenditure incurred multiplied by 225%. The percentage that can be claimed has been increased from 11% to 14.5%.

The advantage of claiming the tax payment is an improvement in the company’s cash flow position. The disadvantage is that relief for the trading loss is obtained at 14.5% only and the surrendered loss is, of course, no longer available for relief in the future. The alternative is that the company carries the loss forward, obtaining relief in the future at a rate of at least 20%. However, this would be dependent on the company making trading profits in the future, such that the loss can be relieved.


The use of exemptions and reliefs

Seed enterprise investment scheme (SEIS) reinvestment relief
The SEIS was introduced two years ago in order to provide a tax incentive to individuals to invest in small new start-up unquoted trading companies. The scheme provides the investor with relief from income tax and capital gains tax.

The relief from income tax has been in the syllabus since 2013.

The relief from capital gains tax is called SEIS reinvestment relief. Although it was introduced by the Finance Act 2012, it was originally excluded from the syllabus as it was initially intended to be available for two years only. However, the relief has now been extended to 2014/15 and future years and has therefore been added to the syllabus for exams in 2015 onwards.

SEIS reinvestment relief is an exemption from capital gains tax arising on the disposal of any asset. It is available where an individual has subscribed for qualifying SEIS shares such that he is eligible for SEIS relief from income tax.  Therefore, SEIS reinvestment relief is subject to the maximum investment threshold of £100,000. The relief is the lower of:

  • 50% of the amount of the gain reinvested in SEIS shares (up to a maximum of 50% of £100,000); and
  • the amount specified in the claim for capital gains tax SEIS reinvestment relief.

Accordingly, the taxpayer can use the relief to reduce his chargeable gains to a particular chosen level in order to, for example, utilise the annual exempt amount or brought forward capital losses. This is similar to enterprise investment scheme (EIS) deferral relief.

A claim by an investor to have an investment in SEIS shares treated as having been made in the previous tax year for the purposes of SEIS income tax relief also has effect for the purposes of SEIS reinvestment relief.  This means that, following such a claim, the relief would be available in respect of gains in the preceding tax year as opposed to the year in which the investment was made.

Capital gains tax SEIS reinvestment relief is withdrawn or reduced where the SEIS income tax relief relating to the shares is withdrawn or reduced. SEIS income tax relief is withdrawn or reduced where the shares are disposed of within three years of acquisition.

If the disposal is not at arm’s length, all of the SEIS income tax relief will be withdrawn and all of the capital gains tax SEIS reinvestment relief in respect of those shares will also be withdrawn.

If the disposal is at arm’s length, the amount of SEIS income tax relief withdrawn is restricted to a maximum of 50% of the consideration received and the same proportion of the capital gains tax SEIS reinvestment relief in respect of those shares will also be withdrawn.

This withdrawal or reduction in SEIS reinvestment relief will result in a chargeable gain equal to the amount by which the relief has been reduced.

On 1 May 2014, Mark sold an antique vase, realising a chargeable gain of £45,000.

On 1 July 2014, Mark subscribed for £50,000 worth of shares in Startup Ltd, a qualifying SEIS company.

Mark claims SEIS income tax relief of £25,000 (£50,000 x 50%) against his income tax liability.

Mark has reinvested the whole of the chargeable gain in respect of the vase. Accordingly, he can also claim up to £22,500 (50% of the gain) of SEIS reinvestment relief in respect of this gain.

On 1 October 2015, Mark sells all of his shares in Startup Ltd for £30,000 in an arm’s length disposal.  As the shares have not been held for three years, £15,000 (£30,000 x 50%) of the SEIS income tax relief is withdrawn.  This is 60% of the original SEIS income tax relief given to Mark (£15,000/£25,000) and his reinvestment relief is reduced by the same proportion.

Therefore, a gain of £13,500 (£22,500 x 60%) becomes assessable on Mark.


The scope of stamp duty and stamp duty reserve tax

The property in respect of which stamp duty and stamp duty reserve tax is payable
Securities traded on AIM (formerly the Alternative Investment Market) are no longer chargeable securities for the purposes of stamp duty and stamp duty reserve tax. Accordingly, no stamp tax will be charged on transactions in such shares.

Further reading
The following articles will be published on the ACCA website later this year.

  • Taxation of the unincorporated business for Paper P6 (UK) – the new business
  • Taxation of the unincorporated business for Paper P6 (UK) – the existing business
  • International aspects of personal taxation for Paper P6 (UK)
  • Inheritance tax and capital gains tax for Paper P6 (UK)
  • Trusts and tax for Paper P6 (UK)
  • Corporation tax for Paper P6 (UK)
  • Corporation tax – Group relief for Paper P6 (UK)
  • Corporation tax – Groups and chargeable gains for Paper P6 (UK)

Written by a member of the Paper P6 (UK) examining team